Money as closed-end mutual fund

[I don't think this is very original, but it's a fun and instructive metaphor to play with. The most important lesson is the way the metaphor fails.]

Suppose I start a closed-end mutual fund. (Brits call it an "investment trust".) I issue shares, and use the proceeds to buy assets like bonds and stocks. Shares in my mutual fund are traded, but shareholders do not have the right to redeem them for a fixed share of the value of the underlying assets that back those shares. (If they did have that right it would be an open-end mutual fund, what the Brits call a "unit trust".) But I have the right to issue more shares if I want, or to buy back shares, if I want.

Suppose that the shares in my closed-end mutual fund are more liquid than the assets that back those shares. If my shareholders value liquidity at the margin, those shares will have a lower yield in equilibrium than the assets that back them. And if my management expense ratio is smaller than the liquidity yield premium, shares in my mutual fund will trade at a premium to the Net Asset Value. And this means I can earn positive profits from my closed-end mutual fund. I can increase the management expense ratio by paying myself a higher salary, or giving some of the returns of the assets to my favourite charity, until the shares trade at par to Net Asset Value.

Competition from other issuers of closed-end mutual funds could reduce my profits to zero. But maybe I have a legal monopoly. Or maybe I have first-mover advantage in a world of network externalities. Shares in my mutual fund are frequently traded because they are liquid, and they are liquid because they are frequently traded. They have a high velocity of circulation. And if they are the most liquid of all assets, all other goods will be bought and sold for shares in my mutual fund, except for the rare barter deal where there happens to be a coincidence of wants. The liquidity race is a winner-takes-all race. (Carl Menger figured this out in 1892.) So it's a natural monopoly, and it's hard for a competitor to break into my established market.

If shares in my closed-end mutual fund are the most liquid of all assets and so are used as a medium of exchange, they will probably also be used as a unit of account. People will quote prices in terms of the number of shares that are needed to buy the good. So the market value of one of my shares is the reciprocal of the prices of other goods.

Like any monopolist, I face a downward-sloping demand curve for my product. The higher my management expense ratio, the smaller the quantity of my shares that will be demanded, and the fewer shares I can issue while keeping the Net Asset Value at par. Maybe I maximise profits; maybe I am public-spirited; maybe I'm a regulated monopoly; maybe my monopoly gets nationalised. If my monopoly gets nationalised, then my favourite charity becomes the government's favourite charity.

What happens if I issue new shares, and double the total quantity of shares outstanding? That depends.

If I double the number of shares by doing a 2-for-1 stock split, the value of each share will halve. Because the value of the assets that back those shares has not changed.

If I double the number of shares by buying assets, and then give those assets to the shareholders, this is exactly like a 2-for-1 stock split. The shareholders sell me assets in exchange for shares, then I give them back the assets they sold me. the value of each share will halve.

If I double the number of shares by buying assets, then give those new assets to my favourite charity, and if people expect with certainty I will never do this again, it is exactly like a 2-for-1 stock split, plus a forced redistribution of wealth from my shareholders to my favourite charity. The value of each share will approximately halve, but may not exactly halve, because changes in wealth distribution may not have exactly equal and offsetting effects on the demand for my shares.

If I double the number of shares by buying assets, and promised to give all the returns from those new assets to my favourite charity, it's exactly the same as if I gave those assets themselves to my favourite charity.

If I double the number of shares by giving new shares to my favourite charity, and if people expect with certainty I will never do this again, the value of each share will also, approximately, halve. It makes little or no difference whether I give shares instead of assets to my favourite charity, since the charity will sell them to buy what it wants to buy.

I might use a helicopter to deliver the new shares to my favourite charity.

If I double the number of shares by throwing new shares out of a helicopter, and if people expect I will do this again next year, the value of each share will more than halve. Because it is exactly like a big increase in my management expense ratio, used to finance an increased flow of gifts to my favourite charity.

What happens if the assets that back the shares in my closed-end mutual fund are bonds, issued by my favourite charity, that are themselves promises to pay shares in my closed-end mutual fund? If I do a 2-for-1 stock split, and if this halves the value of my shares, I also halve the value of the assets that back my shares. And this redistributes wealth away from those who hold bonds in my favourite charity towards my favourite charity. And this redistribution of wealth may increase or reduce the demand for my shares, so the value of my shares may not exactly halve.

That's probably about as far as we can take this metaphor. But if the issuer of a closed-end mutual fund gets to decide his own management expense ratio and the fund's charitable donations, and can change it whenever he feels like it, and gets to choose the conditions under which he will issue new shares and buy back existing shares, the owners of shares in the closed-end mutual fund can't really be said to "own" the assets that "back" the shares in that mutual fund.

[Update: be sure to read dlr's excellent comment below.]

Comments

[Nick Edmonds]

"And this redistribution of wealth may increase or reduce the demand for my shares, so the value of my shares may not exactly halve."

Are you envisioning a situation where it might more than halve? What sort of circumstances did you have in mind?

[Nick Rowe]

Nick E: the people whose wealth increase have a lower wealth-elasticity of demand for my shares than the people whose wealth decreases. That would be the simplest example.

[dlr]

This is the brilliance of Cochrane's money as stock paper, you can twist it into a lot of helpful stories, as you did here with the CEF angle. Fo example:

Wallace Neutrality questions. Think of the management fee and/or charitable donations as "junior" to the shares, in that management will allocate upside surprises to its asset value by giving more donations/fees but will forego donations/fees upon asset losses to protect a particular price per share (or price per share path). Now the makeup of the CEF can actually matter, as riskier assets increase the option value of the true equity (donations/fees) and decrease the value of the shares. When this marginal risk increase matters depends on institutional questions (can the CB increase its "risk" even when the fiscal authority has plenty of tax NPV firepower left?), but from a consolidated CB/Fiscal perspective it eventually shows up as the total market value of shares (money) outstanding increases relative to the NAV (theoretical maximum NPV of future surpluses). That is, there may be concrete steppes before Chuck Norris ever hits the event horizon. A CEF with 110 in assets and a protected market cap of 100 would be safer for the shares than a CEF with riskier assets but also for the CEF with equally safe assets of 310 and a protected market cap of 300.

IOR questions. What happens when the CEF announces a 1.1 for 1 stock split, i.e. a 10% stock dividend? Nothing happens, until the dividend actually comes, and then the stock price declines in 10% jump as in a split. IOR announcements have no immediate price level implications . That is, unless there is also an ad hoc assumption that the future shares outstanding are fixed, such that management will offset stock dividends by allocating more of its NAV cushion to shareholders and away from management/fees (perhaps using it to repurchase the additional stock). In that case, raising the stock dividend immediately increases the share price, but is no different than simply announcing a future reallocation of donation/fee assets toward shareholders (a promise to decrease the liquidity premium and/or increase the primary surplus enough to matter to the risk adjust return on money).

What if the CEF forfeits its monopoly by credibly committing to saturate the market with enough liquidity to erase the premium forever? It can still trade at a discount to NAV on an ex-post basis, as of course many CEFs do. Is its network still protected from competition, or does a permanent zero bound mean the unit of account is fragile upon any fee/donation type action that would merit a discount to NAV? The protection is still there, the asset leakage is just a covert way of reasserting the monopoly power, though of course the monopoly power is not infinite.

[Nick Rowe]

dlr: great comment!

[Michael Sigman]

Nick,

I think that (for once) I follow the analogy. But quick question: when you talk about doubling the number of shares by buying assets, do you mean issuing new shares such that total outstanding shares double, and using the proceeds of the new share issuance to buy assets?

Michael

[Roger Sparks]

Along with your ability to give shares to your favorite charity, you have the ability to give shares to your friends and associates. If you did this, the effect on the anonymous stockholder (who is not a favorite charity, friend or associate) will be negative either by the effect of dilution or the effect of increased competition.

[Nick Rowe]

Michael: Yes. (Though if the shares are themselves used as money, you don't need to sell the new shares for money, then use the money to buy assets; you simply buy the assets with new shares.)

[Michael Sigman]

One more question: say the CEF's favorite charity is called "Population Reassurance In Nasty Times", which foundation seems to do the trick during periodic episodes of irrational social unrest. The shareholders hate the forced loss of their wealth, but the paradoxically stabilizing effect on share value, and on the social glue that helps create the wealth they park in the CEF, are generally agreed upon benefits. They know the helicopter is a continual fact of life, but on balance they accept it. Maybe it is like an imperfect and partial underlying asset insurance plan. The knowledge that the helicoptor is fueled up may even forestall the panic. Then maybe shareholders accept a lower discount rate on future asset revenues and demand no discount on the share currency? The assets are safer even if their investment is partly confiscated in ways they cannot control. Thus the U.S. CEF seems to perversely outperform the more shareholder-friendly ones.

[Nick Rowe]

Roger: in both cases the shares fall in value due to dilution.

Michael: Maybe. Remember though, these shares are currency, and the poor tend to hold a greater proportion of their wealth in currency, and may get hit worst by inflation.

[Peter T]

"If I double the number of shares by buying assets...". What were those assets valued in before you bought them? If they were valued in shares (but not traded), then buying them brings in new assets to the value of the shares issued, so value (in asset terms) is unimpaired. If they were valued in something else, then that something else was money. Or am I missing something?

[Nick Rowe]

Peter: The demand curve for liquidity slopes down; the more liquidity people have the less of a liquidity premium they will pay for additional liquid assets; so the yield on the shares rises if you double the number of shares and double the value of the assets that back them. The price of the shares drops relative to Net Asset Value, for a given management expense ratio.

(It doesn't matter what we value things in.)

[Jussi]

I admit that I have to reread it but a quick question:

"If I double the number of shares by buying assets, and promised to give all the returns from those new assets to my favourite charity, it's exactly the same as if I gave those assets themselves to my favourite charity."

What happens if the fund sucks shares back by making (reverse) repos? The fund still gets the asset revenues which it remits but now the amount of the shares out (base money) is diminished. Or does this again fall back on what is or isn't permanent?

[Nick Rowe]

Jussi: Hmmm. Suppose I buy back half my shares, and at the same time cut the present Value of my charitable donations by an amount equal to the value of the assets I have sold to buy back the shares. And if I buy back shares by borrowing the funds to buy them back, I cut my charitable donations by the amount of the interest I pay to borrow the funds. I think that's (roughly) the same.

This is beginning to hurt my brain.

[Jussi]

Ah, okay, I agree. I missed that repos is not usually zero cost. And the expected cost/profit of the bonds in repo should be around the same.

[Nick Rowe]

I'm wondering if this post would have been simpler if I had assumed that there were no true management costs of managing the fund, and that all the "Management Expense Ratio" was given to charity every year.

[Roger Sparks]

You, the manager of the fund, have complete control over the number of shares and who may receive new shares. You may, or may-not, receive something in exchange for issuing new shares.

You also have the ability to re-issue the original shares by splitting or dividing the number of shares held by each shareholder (which is a simple bookkeeping operation).

Would the manager ever have a need to make promises about delivering shares in the future? Would credibility of the promises matter? Would 'expectations' trump promises?

[JP Koning]

Good post, Nick.

"What happens if the assets that back the shares in my closed-end mutual fund are bonds, issued by my favourite charity, that are themselves promises to pay shares in my closed-end mutual fund? If I do a 2-for-1 stock split, and if this halves the value of my shares, I also halve the value of the assets that back my shares."

Wouldn't this result in some sort of implosion? If the shares halve in value, the assets that back it will halve in value, so the shares will halve in value etc etc?

dlr: "IOR questions. What happens when the CEF announces a 1.1 for 1 stock split, i.e. a 10% stock dividend? Nothing happens, until the dividend actually comes, and then the stock price declines in 10% jump as in a split."

That seems right to me.

In the next bit I believe that you're equating central bank interest on reserves to a CEF stock dividend. I agree with the theory, although in practice central bank can't create new money to pay interest. They have to earn that money out of the existing stock of money prior to paying interest. It would be like the CEF in Nick's example announcing a 10% stock dividend, but the CEF's managers promising to earn those shares from the already-existing float in order make the dividend payment rather than creating the shares de novo. So the total quantity of units outstanding would stay the same throughout.

[Nick Rowe]

Roger: expectations matter a lot (like expectations of my future charitable donations), and if promises affect those expectations, those will matter a lot too.

JP: thanks!

"Wouldn't this result in some sort of implosion? If the shares halve in value, the assets that back it will halve in value, so the shares will halve in value etc etc?"

No. Because the marginal liquidity premium will rise as the market value of the shares falls (the demand curve slopes down), so shares will trade at an increasing premium (or smaller discount) to Net Asset Value.

"I agree with the theory, although in practice central bank can't create new money to pay interest."

I don't get that. They just print new shares to pay interest on old shares, exactly like a 1.1 for 1 stock split.

[BJH]

Nick - I love this post.

[Nick Rowe]

BJH: Thanks! I appreciate your saying that.

[Peter T]

Okay, but aren't you implicitly assuming that everything is valued as an asset before the issue of additional shares? I would say that the issue of shares against an asset actually makes it an asset. A bunch of white guys arrive at some place where the natives do not trade land (they "own" it collectively). The white guys subdue the natives and issue themselves titles to the land, which they then borrow/lend against, using shares. Until the shares are issued, the land has no share value - it is neither liquid nor illiquid. Now substitute "parking meters in Chicago" or "ability of students to pay back loans" for "land the useless natives cannot defend properly". "Asset" is not a natural term.

[JP Koning]

"I don't get that. They just print new shares to pay interest on old shares, exactly like a 1.1 for 1 stock split."

That's the point I'm making. Central banks have to earn existing shares in order to pay interest on existing shares, so it's not like a stock split. If they could just print new shares to pay interest, then its as you say, just like a stock split.

[JP Koning]

"No. Because the marginal liquidity premium will rise as the market value of the shares falls (the demand curve slopes down), so shares will trade at an increasing premium (or smaller discount) to Net Asset Value."

I see. And if we were operating in something more akin to a competitive environment, then we would get an implosion? ie. if the shares were to halve in value, the assets that back it would halve in value, so the shares would halve in value.

[Nick Rowe]

JP: "And if we were operating in something more akin to a competitive environment, then we would get an implosion? ie. if the shares were to halve in value, the assets that back it would halve in value, so the shares would halve in value."

I think that's right. Implosion or explosion. Unless the charity itself decided to pin down the value of its bonds by making the default risk endogenous to the value of the bonds. Which brings us to FTPL, I think

You have lost me on your 10.15 comment. Are you saying that the BoC cannot by law pay interest on reserves unless it has positive net equity?

[JP Koning]

It's more like a central bank can only create money by buying an asset. So if it wants to boost interest on reserves, it needs to pay this extra expense out of its incoming flow of already-created money. It can't just print new money to pay interest on old money since it isn't receiving an asset in return.

[Nick Rowe]

JP: Unless there is some arcane detail of the laws restricting the Bank of Canada that I don't know about, that is just plain wrong. If the deposit rate is 0.5%, and BMO has $100 on deposit at the BoC, then every year the BoC simply writes up BMO's deposit by 50 cents. It "prints" (only on silicon, not on paper or plastic or metal) an additional 50 cents. And that is exactly what the BoC does now (except it's daily, not yearly).

Central banks print money, and use that money to buy assets, hire economists, pay the hydro bill, and pay interest on deposits. And they burn money too, when they sell assets, rent out assets, get paid interest on their bonds, and other loans.

[JKH]

Nick, JP

I looked at that question here:

http://monetaryrealism.com/john-cochranes-monetary-policy-with-interest-on-reserves/

Short version:

“The central bank pays interest on reserves in the form of newly created reserves. The initial accounting entry is a credit to reserves and a debit to central bank equity (both accounts on the right hand side of the central bank balance sheet). Therefore, given this form of payment, it would appear that the nominal quantity of reserves should grow at the rate of nominal interest paid, other things equal…

But in fact, standard institutional arrangements for Treasury and the central bank mean that reserve growth is not a function of the payment of interest on reserves. To see this, we need to examine related monetary operations…

The full effect on the banking system configuration is that the initial addition to reserves that arose from the payment of interest on reserves is reversed back out of reserves by the issuance of additional Treasury debt that drains reserves in the usual way and replenishes the Treasury account. (The same thing happens in parallel with respect to central bank operating expenses that similarly show up as payments from central bank equity into bank reserve accounts. Treasury ends up draining that effect with more borrowing as well, since it is part of the full fiscal effect.)…

So the payment of interest on reserves in the form of additional reserves is only a temporary effect at the system level, normally replaced by the more permanent financing of interest on reserves in the form of additional Treasury debt borrowing. This leaves the central bank free to pursue reserve growth objectives through open market operations, independently from operational effects that would otherwise be completely arbitrary relative to such policy objectives. The obvious example of this is evident in the stated policy objectives of various Federal Reserve quantitative easing programs. There is no direct connection between any of those objectives and the notion that bank reserves should grow at the same rate as and according to the amounts paid in the form of interest on reserves paid and left in the form of reserves."

Full pain version from the post:

“The central bank pays interest on reserves in the form of newly created reserves. The initial accounting entry is a credit to reserves and a debit to central bank equity (both accounts on the right hand side of the central bank balance sheet). Therefore, given this form of payment, it would appear that the nominal quantity of reserves should grow at the rate of nominal interest paid, other things equal.

But in fact, standard institutional arrangements for Treasury and the central bank mean that reserve growth is not a function of the payment of interest on reserves. To see this, we need to examine related monetary operations…

The central bank earns a profit roughly equal to the interest it receives on Treasury bonds less the interest paid on reserves and the cost of other operating expenses. That profit is remitted to Treasury. But the remittance of CB profit to Treasury is not the same as the full fiscal effect of its operations on Treasury. Treasury pays interest to the CB and receives profit from it, so that both flows must be included in the calculation of the net fiscal effect of the CB on Treasury.

From an operational and accounting perspective, the central bank processes interest payments from Treasury by debiting Treasury’s deposit account at the bank and crediting its own equity position. It remits profit to Treasury in a reverse procedure, debiting its own equity position and crediting Treasury’s deposit account. The net fiscal effect on Treasury is the combined effect of the bond interest outflow from Treasury and the profit inflow to Treasury.

Given the composition of the central bank’s profit as noted above, this net fiscal effect is equal to the cost of interest paid on reserves plus other CB operating expenses. This makes sense when considering the CB as the issuer of debt in the ultimate form of bank reserves.

This net fiscal cost is typically a deficit in respect of Treasury’s position with the central bank. Again, this makes sense when considering that the payment of interest on reserves is a fiscal cost for this ultimate form of debt.

Thus, central bank debt operations typically result in a marginal deficit for Treasury. That shows up directly as a net outflow from Treasury’s account with the CB.

However, because Treasury adheres to a cash management discipline in fiscal operations, it will replenish that net outflow through further bill or bond market borrowing (except for the case where a primary surplus is available to pay all or some of the interest.)

The full effect on the banking system configuration is that the initial addition to reserves that arose from the payment of interest on reserves is reversed back out of reserves by the issuance of additional Treasury debt that drains reserves in the usual way and replenishes the Treasury account. (The same thing happens in parallel with respect to central bank operating expenses that similarly show up as payments from central bank equity into bank reserve accounts. Treasury ends up draining that effect with more borrowing as well, since it is part of the full fiscal effect. )

Thus, the central bank’s payment of interest on reserves in the form of additional reserves is only an interim stage of “financing” the expense of paying interest on reserves. In final form, this financing consists of further Treasury debt issuance that drains and replaces the original reserve effect of the central bank’s interest payments. This all assumes “other things equal” – e.g. that interest expense is not covered instead in part or whole by a current primary surplus.

So the payment of interest on reserves in the form of additional reserves is only a temporary effect at the system level, normally replaced by the more permanent financing of interest on reserves in the form of additional Treasury debt borrowing. This leaves the central bank free to pursue reserve growth objectives through open market operations, independently from operational effects that would otherwise be completely arbitrary relative to such policy objectives. The obvious example of this is evident in the stated policy objectives of various Federal Reserve quantitative easing programs. There is no direct connection between any of those objectives and the notion that bank reserves should grow at the same rate as and according to the amounts paid in the form of interest on reserves paid and left in the form of reserves.

Nick Rowe has posed the question directly as to what people might or should expect for money growth when interest is paid on reserves, given that interest is paid initially in the form of new reserves. In fact, that initial step is quickly undone by standard fiscal operations. The central bank intends for the growth path of reserves to be what it determines in using open market operations – not by paying interest on reserves with new reserves. Market participants understand this – if not explicitly then implicitly. Indeed, it would be counterintuitive to expect a relationship between interest on reserves and money supply growth unless there were an explicit announcement of such an intention by the central bank – especially given the non-standard operational adjustment required to achieve such an objective. Indeed, none of the Fed’s quantitative easing programs have had anything to do with such an objective. As noted, the interest paying mechanism is neutral by institutional design in terms of its money effect, due to the cash management discipline treasury exercises through its own operating account at the central bank. Of course, alternative institutional arrangements can always be considered. But if the question is asked as to what people expect now, it is reasonable to consider the monetary system as it currently operates in answering the question."

[Nick Rowe]

JKH: Thanks. I *think* I understand you. So it is possible (and legal) for the BoC to print new money to pay interest on old money, but in practice it sells bonds to finance the payment of interest on old money, so that MB stays the same, unless it needs to respond to some shock.

[JKH]

I think that’s about right Nick (and a hell of a lot shorter than what I said!)

In fact, what you first said is true at the margin of operations – it is not only possible and legal but that is what actually happens from an accounting perspective - the CB pays interest on reserves by debiting equity and crediting bank reserves – which is the accounting translation of printing money in this context.

It's what happens subsequently that changes the cumulative story for the balance sheet.

The payment of interest on reserves is actually most of the net fiscal cost to treasury that results from channelling debt costs through the CB (because bond interest cancels and because most of the rest would be operating costs of the central bank).

So that net fiscal cost ends up being a debit to Treasury’s account at the CB.

But there’s a lower bound of zero on that account according to regular operating procedures.

So that in effect forces Treasury to replenish its account at the CB by issuing bonds that have the effect of attracting bank reserves back into the Treasury account.

Another way of looking at it is that it is possible for the CB to pay interest on reserves forever and at any interest rate – by printing money at the margin just as you describe – yet without growing the balance sheet at all. Because Treasury will suck that money back in by issuing debt. And that’s about the same as your assumption about an unchanged MB.

And that scenario puts into context the nature of CB balance sheet growth - the CB pretty much has to do open market operations to get balance sheet growth. It won't come from payment of interest on reserves alone or at all (and that includes the QE scenario).

Also, balance sheet growth in currency requires open market operations (as in pre-crisis CB operations) - unless currency is funded by a contraction in QE reserves that happen to be outstanding.

Of course, this all changes in description if you visualize a consolidated treasury/CB operation. And I mean an actual consolidated operation. That's different from mere financial statement consolidation. I think it’s good to try and keep those two ideas separate because you will inevitably get discussion coming in from commenters who want to think about actual operations, and the terminology and understanding can get pretty confused. I used to get rattled at the MMT heavyweights who would purport to describe actual US monetary operations as if it was the Fed's SOMA account that was cutting social security checks. What a mess. (They still do it, but I don't read them anymore.)

[Nick Rowe]

JKH: re your last paragraph: I feel the same way. As a thought-experiment, it's OK to simplify and treat the government+central bank as one entity. So that government spending is financed by a mix of taxes, bonds, and printing. But to say that government really really does finance spending by printing, and then the central bank maybe comes along afterwards and sells bonds to mop up some of the money, just sounds a bit wrong.

[Too Much Fed]

JKH said: "In fact, what you first said is true at the margin of operations – it is not only possible and legal but that is what actually happens from an accounting perspective - the CB pays interest on reserves by debiting equity and crediting bank reserves – which is the accounting translation of printing money in this context."

Let's say the central bank receives interest from debt as currency and then immediately transfers the interest to a commercial bank to pay interest on reserves as currency.

Why shouldn't that be considered transfers of existing "money"?

The way the system is set up now, would the central bank (the fed) ever "print" to pay interest on reserves and go into a negative equity position?

[Too Much Fed]

JKH, I went over JP's site. It says:

"The Federal Reserve, for instance, is 100% owned by private banks."

Is that right?

[Too Much Fed]

JKH, does this sound right?

http://www.newyorkfed.org/research/current_issues/ci18-3.pdf

"The Interface between the Federal Reserve and the Treasury

At first impression, the Federal Reserve and Treasury mandates
might seem sufficiently distinct that the two institutions should
be able to function independently of each other. However, the
Treasury funnels most of its receipts into, and it disburses most
of its payments from, the TGA. Thus, there is a continuous flow of
funds from private depository institutions to the TGA and back
again. During fiscal year 2010, $11.6 trillion flowed into, and then
out of, the TGA.

Flows of funds between the TGA and private depository
institutions were important prior to the crisis because the TGA
is maintained on the books of the Federal Reserve; increases in
TGA balances stemming from Treasury net receipts drained
reserves from the banking system and, in the absence of offsetting
actions, put upward pressure on the federal funds rate.
Conversely, decreases in TGA balances resulting from Treasury
net expenditures added reserves to the banking system and,
absent offsetting actions, put downward pressure on the funds
rate. This dynamic created an important interface between
Treasury and Federal Reserve operations. The sections that
follow describe first how Treasury and Federal Reserve officials
cooperated to manage the interface before the crisis, and then
how the interface has changed since the onset of the crisis and
the expansion of the Fed’s balance sheet."